Saturday, February 20, 2010

Mike Solomon of CPA firm Amper, Politziner and Mattia expected a wave of taxpayers to traditional IRAs to Roth IRAs this year--primarily because Congress waived the $100,000 AGI limitation for the conversion during 2010. While acknowledging that the conversion required payment of taxes on the converted amount, Solomon believed that the two-year spread provision and the 2010 specific reconversion provision would still generate a lot of conversions, especially since Roth does not require minimum distributions at 70.5 years and Roth withdrawals are tax-free. Solomon then acknowledged that the upfront tax payments overwhelmed other considerations, especially since prudent financial planning requires that non-IRA assets be used to cover the taxes.

To me, three key issues apply on Roth conversion (two comments before going further: [1] consult with your own tax preparer/advisor about your specific circumstances (my attempt at a Treasury 230 disclaimer), [2] for taxpayers under $100K, there is no immediate plan to close Roth IRA conversions). Issue one: what is your age? Conversion makes comparatively more sense if you are over 50, because the time value of paying taxes now is less painful; [2] on a similar line of thought, what do you expect in the way of inflation? If you believe that significant inflation is a real possibility, conversion to a Roth IRA makes less sense because the present value of taxes paid today may be much greater than 10-30 years from now, [3] what is your AGI? You have more flexibility in deferring the conversion if your AGI is under $100K; additionally, your marginal tax rate on the conversion (thus tax paid now) is lower if AGI is middle-incomeish.